Munis Gain Favor Amid Rising Taxes and Economic Uncertainty

The attractiveness of municipal bonds (munis) is increasing due to their tax-exempt status, according to MacKay Shields LLC. With higher interest rates leading to steeper tax bills for savers and key individual tax cuts set to expire, investors are looking for ways to reduce their tax liabilities. Bob DiMella, co-head of MacKay Municipal Managers, notes that the US's growing deficit and debt will likely pressure lawmakers to raise taxes, making munis an appealing option. Despite President Joe Biden's pledge to raise taxes on businesses and high earners and Donald Trump's campaign for tax cuts, DiMella believes it will be difficult for the economy to grow fast enough to pay off the debt. This scenario will drive demand for munis next year. Some investors are concerned about the future of the municipal bond exemption, but DiMella says its elimination is unlikely, and existing bonds would likely be grandfathered in, making them more valuable. Market Overview:

• Tax-exempt status of munis increases their appeal.
• Higher interest rates and expiring tax cuts lead to steeper tax bills.
• Growing US deficit and debt pressure lawmakers to raise taxes.

Key Points:

• Biden and Trump’s tax policies unlikely to significantly change the demand for munis.
• Elimination of municipal bond exemption is unlikely.
• Investing through mutual funds recommended to navigate the municipal yield curve.

Looking Ahead:

• Optimism about municipal credit with upgrades outpacing downgrades.
• High-yield municipal bond funds see significant inflows.
• Recommended portfolio mix: 75% investment-grade and 25% high-yield munis.

MacKay Shields recommends investing in munis through mutual funds to navigate the municipal yield curve, which has been inverted all year. The firm is optimistic about municipal credit, highlighting that upgrades have outpaced downgrades by a ratio of 2.1 to 1. High-yield municipal bond funds have seen significant inflows, and MacKay suggests a portfolio mix of 75% investment-grade and 25% high-yield munis. For investors looking to tap into the $4 trillion municipal market, active portfolio positioning is crucial. The asset manager is broadly optimistic about municipal credit, despite the potential of an economic slowdown, and pointed to municipal credit upgrades, which so far have outpaced downgrades by a ratio of 2.1 to 1. Much of this year’s inflows have streamed into high-yield municipal bond funds, and year to date, higher-yielding municipal debt had returned 4.8%.